The Definitive guide to the First Time Home Buyer SouthAfrica [Townhouse/Apartment]
- BUYING A HOUSE FOR THE FIRST TIME?
As a first time home buyer, faced with the prospect of buying your first home, the questions start! Buying a house is not a simple matter and ignorance can cost you thousands.
- What type of property should I buy?
- How important is location?
- Where should I buy a property?
- How do I establish the correct price to pay?
- Must I pay the asking price?
- Can I afford a bond?
- What size deposit do I need?
- What hidden costs are their?
- How does the legal process work to transfer the property into my name?
I recently assisted a first time home buyer who came to me for advice as she was about to put in an offer on her first home. She was purchasing it though another agency in an area where Targer Properties does not operate, so I had no vested interest in swaying her decision either way.
I was able to use the tools and experience available to me to show her that she was about to pay almost 25% too much. She was able to go back to the agent armed with the correct up-to-date market information and successfully negotiate to secure the property at a market related price.
Price is one of the many factors when buying a home, and much heartache and money can be saved by making the correct informed decision.
The Property Ladder
I love the metaphor of the Property Ladder to describe the process of residential property ownership. It describes the ability to climb both economically and socially. I recall my own tentative steps onto the property ladder. The promise of growing my wealth, adding stability to my young family and the feeling of having arrived ! Not forgetting the obvious benefit of escaping my landlord. No longer can a relative stranger have so much effect on my life. I could live there as long as I wanted, keep my “rental” fairly constant and avoid the inconvenience of a move.
I had seen my older friends and family who were renting having to move, simply because their landlord decided to sell rather than renew their lease.
The metaphor because ladders have steps, and by simply following the steps you can get up there where you are aiming at – The TOP!
Check out this short video describing the property ladder.
STEP 1: WHAT TYPE OF PROPERTY SHOULD I BUY?
Typically young families that are considering buying their first home are also only starting out in their careers. They are paying off that first or second car, furnishing home etc. It stands to reason that cost will be a major factor.
To this end flats and sectional title townhouses tend to be more cost effective than standard full title houses and clusters. Especially when you are buying your first property as an investment
Full title houses that can fit a tight budget are normally found further away from schools and places of work in poorer areas, and that may not be suitable.
Fortunately flats and townhouses are great options and are found closer to places of work in the city. I have my reservations regarding flats. Commonly found blocks of flats with retail shops on the ground floor, limited parking and poor security are the problem. You have no control over the type of shops who may move in – The retail component can have a devastating impact on your value!
Townhouses offer secure living environments, frequently with 24 hour on site security, electrified fences all around, resourt features like pools, tennis courts, clubhouses and braai areas.
Townhouses are also great investments, so when you decide to move up the property ladder and upgrade your living space, you can lease the townhouse out as a fantastic buy to let investment.
That leads me to the conclusion that townhouses are fantastic first time home buyer options.
In this short video I go into more detail on choosing the right type of property and in particular the pros and cons of buying flats and townhouses as a first time property purchase..
STEP 2: LOCATION LOCATION LOCATION
The location of your property is the most important decision a home buyer can make. Location influences your lifestyle, your status in the community, your convenience to work, shops, schools, recreation facilities, security etc.
The idea is to pay as little as possible to obtain the best possible location, and fortunately townhouse developments often meet than requirement very well.
A simple rule of thumb is to consider that you need to get to schools and places of work every day of the working week. Visits to places of recreation and shopping are less frequent.
Try to buy your home close to school and your place of work
In this short video I look at location in a bit more detail.
Step 3: Affordability
Next step is to establish how much a bank will believe that you can afford. All the banks have their own lending criteria, there are some similarities that allow you to apply a rule of thumb.
Assuming you have a monthly surplus, then add that surplus to your current rental to establish your affordability- since you won’t be renting anymore 🙂
The banks will then limit the size of your bond repayments to be less than your affordability.
Banks will generally offer 100% finance to clients who can afford it and with a good credit record, but offer a special deal for the first time home buyer. They offer 105% bonds to pay for the full purchase price plus the transfer costs which are generally just over 5% . To calculate the bond transfer costs, [click here]
This table will give you a rough guide of the monthly repayment for your bond.
A R600 000 bond at 7% interest rate gives a monthly installment of R 3992 per month
Recently I interviewed Rodney Reynard of Mortgage Max who showed us how accessable bond finance is and how to go about obtaining bond finance.
Getting a bond is as simple as 1, 2, 3.
We used an example of a R600 000 bond.
Interest rate 7%, over 30 years.
The bond repayment of approx. R4000
1: Affordability – The 30% Rule
Banks will ensure that your monthly bond repayment, also know as the monthly bond instalment, must be less than 30% of your basic monthly salary.
Your basic salary is your monthly salary before deductions (Not the cost to company figure!)
Simple way to work it backwards. Take the bond payment and divide it by 30% .
R4000 / 30% = R13 333 ( So you must earn higher than R13 333 per month to qualify for a bond.)
2: Affordability – Monthly repayment affordability
Do a monthly income and expenses exercise [click here to download a template] and show the bank that you have sufficient monthly income to be able to pay the monthly bond cost plus the monthly levies and utility charges.
Generally on a property of this size, the bank will add R 2000 to the bond repayment to get to an “affordability number”
In this example. You would need to do your monthly budget of income and expenses and show that you can afford R 4000+ R2000 = R6000 per month to qualify.
Note: In your budget, take out your rental payment as this will be replaced by the bond payments
3: Credit score
The credit bureau calculates a “credit score” for any person who has credit. The banks then have their limits below which they will not grant a bond. An added bonus of a higher your credit score the lower interest rate you can negotiate!
How to increase your credit score?
Take out at least one retail account or credit card. Not simply an account. You must have an account which will let you spend up to a certain limit (your credit limit) that you pay off in monthly installments.
Do the following:
Pay these monthly installments religiously. Pay the installment in full and never late.
Don’t use more than half of your credit limit. This shows the bank that you are spending within your limits
Do not take out any “payday loans” or “micro loans”. They are expensive and they show the bank that you are not in full control of your finances.
That’s it, how to get a bond in three easy steps.
Check out this video interview with Rodney where we discuss these three steps to obtain bond finance.
WARNING
The banks generally require that you take cover – but don’t get caught out!!!
BOND FINANCE LIFE COVER WARNING
It is sad that I have to give this warning, but the truth is that I have seen numerous banks unscrupulously rip off their clients when it comes to life cover on their bonds.
This is how the rip off occurs.
When you are busy accepting the bond finance, the bank tell you that you need life cover (to protect the bank) in case you die before the bond is paid off.
The bank’s motives are obviously selfish, but there is a major benefit to your heirs. Should you die prematurely, all your bonds will get paid off instantly and your heirs will immediately start reaping the benefits of a paid off property portfolio.
The problem arises when, at the point of you accepting the bond finance, they give you a document sign wherein you buy life cover with the bank, at exorbitant rates.
I recently spoke to a first time home buyer who was caught like this and is paying enough for R 2 000 000 worth of life cover if he sourced his life cover independently, but is only getting R800 000 from his bank. (So he is paying more than double)
I am planning to video interview a friend who sells life cover to show you how to avoid paying more than double for your life cover.
To make sure you see the video when it comes out, simply subscribe to our YouTube Channel [here]
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Let us help you make your first step onto the property ladder – It is easier than you think!
With the interest rates so low, you will find it cheaper to buy than to rent.
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